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H&R Block Calls Out the DIY Return

Posted June 9, 2015

H&R Block provided a review of their 2015 tax season results during a call yesterday evening. Given its scale, Block's results are a good proxy for their entire tax season. The company estimates that it helped to prepare one of every seven returns filed this year. Block says it sold 5.1 million refund transfers and issued another 2.4 million Emerald Cards.

But instead of sticking to a nuts-and-bolts presentation of financial results, Block CEO William Cobb went on at length to discuss the issue of tax fraud.

According to Cobb, the growth in the number of fraudulent returns is enabled by the arrival of new tools that help people file their returns without the help of a paid preparer. As the CEO of a national tax prep company, Cobb is well positioned to understand the shift in how people do their taxes. Millions of people prefer a "do-it-yourself" ("DIY") solution. DIY costs less, and to be honest, many returns are so simple that even a novice can do the job in thirty minutes.

Unfortunately, the DIY consumer segment also includes a subset of fraudsters who find the new tools to be ideal for identity theft. The basic scheme is this: a) steal personal information b) file a fraudulent return c) receive the refund electronically, often through a one-time bank account. The crime is not noticed until the legitimate return is filed. Naturally, the burden associated with contesting the fraud falls to the victim. I guess fraud is like most things: the best way to get it done is to do it yourself.

We believe the shift from assisted to DIY is driven by fraud. In fact, if you took a reasonable position on the level of fraud in the DIY category, including tax identity theft and EITC fraud, the DIY category actually declined over the past five years. Said differently, despite the increasing number of free DIY options, if we were to exclude the impact of fraud, we believe the proportion of DIY returns would have actually decreased while the proportion of assisted returns would have increased.

In fact, Cobb seemed to say that the theory that consumers prefer DIY is not proven and may in fact be entirely wrong. Cobb mentioned that tax identity theft increased by sixty percent between 2012 and 2013. Moreover, the system seems to encourage the fraudsters to use DIY, as documentation requirements are lower for those returns as opposed to the ones that were completed with the help of a paid preparer.

Cobb is taking his concerns to regulators and also to the public. He has been vocal about his interest in more regulation. He clearly supports the idea of preparer licensure, for example. Why do we require hair stylists to be licensed but allow just about anyone to work as a professional tax preparer?